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Can Automatic Tax Increases Pay for the Public Spending Effects of Population Ageing in New Zealand?

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  • Creedy, John
  • Gemmell, Norman

Abstract

This paper examines the extent to which projected aggregate tax revenue changes, association with population ageing over the next 50 years, can be expected to finance expected increases in social welfare expenditures. Projections from two separate models, dealing with social expenditures and income tax and GST revenue, are used. The results suggest that the modest projected required increase in the overall average tax rate over the next 50 years can be achieved automatically by adjusting income tax thresholds using an index of prices rather than wages. Based on evidence about the New Zealand tax system over the last 50 years, comparisons of average and marginal tax rates suggest that such an increase may be feasible and affordable. The paper discusses the range of considerations involved in deciding if this automatic increase in the aggregate average tax rate, via real fiscal drag of personal income taxes, is desirable compared with alternative fiscal policy changes.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2820
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Bibliographic Info

Paper provided by Victoria University of Wellington, Chair in Public Finance in its series Working Paper Series with number 2820.

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Date of creation: 2013
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Handle: RePEc:vuw:vuwcpf:2820

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Postal: School of Accounting & Commercial Law, Victoria University of Wellington, PO Box 600, Wellington, New Zealand
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Web page: http://www.victoria.ac.nz/sacl/about/chair-in-public-finance
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Keywords: Taxation; Aging population; Public spending; Fiscal policy;

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  1. Bandyopadhyay, Debasis & Barro, Robert & Couchman, Jeremy & Gemmell, Norman & Liao, Gordon & McAlister, Fiona, 2012. "Average Marginal Income Tax Rates in New Zealand, 1907-2009," Working Paper Series 2423, Victoria University of Wellington, Chair in Public Finance.
  2. John Creedy & Grant M Scobie, 2002. "Population Ageing and Social Expenditure in New Zealand: Stochastic Projections," Treasury Working Paper Series 02/28, New Zealand Treasury.
  3. Simon Loretz, 2008. "Corporate taxation in the OECD in a wider context," Working Papers 0821, Oxford University Centre for Business Taxation.
  4. John Creedy & Grant M. Scobie, 2005. "Population Ageing and Social Expenditure in New Zealand," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 38(1), pages 19-39, 03.
  5. Matthew Bell & Gary Blick & Oscar Parkyn & Paul Rodway & Polly Vowles, 2010. "Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position," Treasury Working Paper Series 10/01, New Zealand Treasury.
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